Affected by the war risk aversion sentiment and Q3 earnings reports that were lower than expected, the Treasury bond interest rate hit a new high, the Fed sounded hawkish again, and the economic data was better than expected (retail, initial jobless claims), after a slight increase in the first two weeks, the US stock index fell sharply last week, with NAS100 falling more than 3% and SP500 falling 2.5%, closing below the 200-day moving average. Big tech companies led the decline last week; in addition, European and Asian stock markets also generally fell, with Germany 30 falling 2.4%, China50 falling 4.3% (although China's GDP exceeded expectations by 4.9%, deflator-1.4%), and JPN225 falling 2.7%. US small-cap stocks and Chinese stocks fell below their lows since the beginning of the year.
Gold prices rose nearly 3% last week, hitting a five-month high. Cryptocurrencies led by BTC surged against the backdrop of macro headwinds last week, which is consistent with the view we put forward in the previous week's weekly report. Against the backdrop of rising uncertainty, the need for diversified allocation will become more prominent, and alternative assets such as gold and digital currencies will benefit, although the cryptocurrency market started a week later than gold.
The fact that cryptocurrencies were able to buck the trend and surge amid falling global stock markets broke the previous positive correlation between the two and will help cryptocurrencies further restore confidence and move towards an independent trend.
Defensive stocks performed stronger:
According to GS PrimeBook data, last week, the information technology sector saw a large-scale reduction in positions and profit-taking among institutional investors, mainly concentrated in stocks of poor quality:
The 10-year US Treasury yield almost hit 5% in intraday trading on Thursday, the highest level since July 2007; the 30-year US Treasury bond challenged the 5.1% mark for two consecutive days on Thursday and Friday, the highest level since May 2007. Since August, the 10-year and 30-year increases of 1 percentage point are equivalent to 4 interest rate hikes. In addition, the government bonds of major European countries are also challenging multi-year highs (DE 10yr 2011, IT 10yr 2012, GB 10yr 2008)
Historically, Treasury yields have peaked ahead of the Fed's policy rate, and if we expect the Fed to be done raising rates soon, yields may also be close to their peak levels.
The Bank of Japan has failed to stop the 10-year government bond yield from breaking through 0.8% (the highest level since 2013), which may further reduce Japanese investors' reliance on US dollar assets:
S&P confirmed that Italy's sovereign debt rating remains at BBB with a stable outlook. The widening gap between Italian government bond yields and those of German and other core eurozone bonds is likely to be a focus of this week's ECB meeting, with attention paid to whether it will be supported first through the PEPP reinvestment plan.
Data released by the U.S. Treasury on Wednesday showed that Chinese investors sold $21.2 billion of U.S. bonds and stocks in August, the most in four years, including a record $5.1 billion of U.S. stocks, sparking speculation that they were liquidating assets to obtain U.S. dollar cash in case they needed to intervene to defend the yuan in the future.
3Q Financial Report Progress
Earnings expectations for the S&P 500 companies this quarter have worsened, based on actual results from 86 companies that have reported, as well as forecasts from companies that have not yet reported but are expected to report.
Combined with the companies that released their financial reports last week, the overall net profit is expected to fall by 0.4% compared with the same period last year. This expectation is slightly lower than the expectation of the previous week, when the consensus estimate was a year-on-year increase of 0.4%.
Particularly noteworthy is the star company Tesla, whose third-quarter 2023 financial report shows that Tesla's revenue in the third quarter of this year was approximately US$23.4 billion, a year-on-year increase of 9%, lower than Wall Street's expectation of US$24.3 billion, the slowest growth rate in three years; net profit was US$1.853 billion, a year-on-year decline of 44%, and gross profit margin further declined to 17.9%, down 0.3 percentage points from 18.2% in the second quarter, a four-year low. Combined with the background of a general correction in technology stocks, Tesla's stock fell -15.22% last week, and its market value evaporated by more than US$100 billion.
Another star company with the opposite fate to Tesla is TSMC, which reported third-quarter revenue of NT$547 billion (US$17 billion) last week, down 11% from the same period last year. Net profit was NT$211 billion, higher than the NT$190 billion analysts predicted, but down 25% from the same period last year. But the company expects a broader recovery in semiconductors next year and stronger demand for high-end chips. So TSMC shares closed up 1% last week against the trend.
It is also worth noting that revenue from its high-performance computing division, which includes high-end artificial intelligence chips, accounted for 42% of its total sales, down from 44% in the previous quarter but up from 39% in the same period last year.
Progress of the Israel-Hamilton War
The Israel Defense Forces and conscripted reservists are currently gathering on the border between Israel and Gaza, ready to launch a ground offensive against Gaza at any time.
In order to prevent the escalation of the Israeli-Kazakh war, more than a dozen countries held a peace summit in Cairo last weekend. Major countries around the world sent officials to attend the summit, but Israel refused to attend. In the end, due to differences among the leaders and representatives of Arab and Western countries attending the meeting, no joint statement was issued after the meeting. Arab leaders condemned Israel's bombing of the Kassar Strip and demanded that Israel immediately end the action. Western leaders mostly emphasized that civilians should be protected and called for humanitarian assistance to civilians.
Biden visited Israel last week, sending a particularly strong signal of support during the war. He then asked Congress for $14 billion in aid to Israel (a total of $100 billion, a big fiscal release), and he also said he did not want to send U.S. troops to fight Russia on Ukrainian territory, but did not make the same promise for Israeli territory.
According to sources, the US government has pressured Israel to postpone its upcoming invasion of Gaza in order to release more Hamas hostages. Blinken: "There are still 10 Americans missing in this conflict... We know that some of them are being held hostage by Hamas, and an estimated 200 hostages are also being held in Gaza." But at the same time, the US military is also sending more missile defense systems to the Middle East and sending additional US troops under the Ready to Deploy Order.
Israel has said it will dismantle Hamas no matter what happens to the hostages. Hamas offered to repatriate two Israeli women on Saturday, but Israel refused to accept them, with the prime minister's office calling it a propaganda ploy by Hamas to win international sympathy.
IDF spokesman Daniel Hagari said on Saturday that the IDF will increase air strikes on Gaza from today. When asked whether Israel would stop ground operations in Gaza due to US pressure, Hagari said the Israeli military would launch such an operation when military conditions are optimal.
Israel's prime minister warned Hezbollah that joining the war would be "devastating" for Lebanon.
The death toll in Gaza has risen to 4,651, with more than 14,245 injured since October 7, according to Gaza's Palestinian Ministry of Health on Sunday.
At present, it seems that the Israel-Pakistani war may not have really started yet, and the United States is unlikely to organize Israel to send ground troops. The impact on oil prices may continue for some time. Middle Eastern countries may use crude oil as a weapon against Israel and its allies. For example, Iran’s Foreign Minister called on all Muslim countries to impose an oil embargo on Israel last week, which stimulated oil prices to rise again.
The most likely short-term consequence is a reduction in Iranian oil exports. Iranian oil exports are currently at 2 million barrels per day, the highest level since 2018, largely due to the easing of US sanctions. However, Iran's open support for Hamas and Hezbollah may lead to a major shift in US policy toward Iran, but it will have little impact on Opec's production of more than 30 million barrels per day.
And don’t forget that last week U.S. forces came under drone attack in Iraq and Syria, while the Navy was hit by drones and cruise missiles launched from Yemen.
In addition, the US Department of Energy said last week that it is ready to buy 6 million barrels of oil for reserves at $79 per barrel or less. The time frame for potential purchases is December and January. This of course means zero replenishment, because it is difficult for oil to fall that low, and the US Strategic Petroleum Reserve is already half depleted at a time when geopolitical risks are at their highest level in years:
News of the SPR replenishment program helped push up oil prices, with $79 appearing to be the new floor for oil prices.
The US House Speaker is in trouble again
Jim Jordan, who was mentioned last week, ultimately lost the election. Some commentators said that from the beginning of the year when McCarthy had to go through 15 rounds of voting to be elected Speaker of the House, to now when it is even difficult for the Republican Party to come up with a recognized candidate from its own party, the "difficult birth" of the Speaker of the House has become one of the "most serious institutional crises" that the American political arena has encountered in decades.
As temporary government funding will run out on November 17, concerns about a government shutdown will return to the market as time goes by. Coupled with Biden's plan to provide more than $100 billion in military aid to Ukraine and Israel, the market is pricing in greater supply-side pressure on U.S. debt due to a substantial increase in U.S. fiscal spending and the internal turmoil in the U.S. government, resulting in a 10-year record high since 2007.
There is a bit of the flavor of America's Truss Moment here. Think about how last year, the UK increased its deficit significantly in the face of inflation, triggering the collapse of the capital market and bringing about the shortest-lived British Prime Minister in history, Ms. Truss.
Hawkish comments from Fed officials
Fed Powell: hinted that interest rates may remain unchanged at the next policy meeting ending on November 1. But inflation is still too high, and if the economic situation is good, there is still a possibility of raising interest rates. (Hawk)
Fed Logan: There is absolutely no plan to cut interest rates at present, and it is not certain that inflation is returning to the 2% level. Although there are some encouraging signs of inflation development, it is still at a high level, which makes it necessary to continue to maintain restrictive financial conditions. (Hawk)
Fed Bostic: The long-term equilibrium of the U.S. economy is still moving in a positive direction. He believes that there will be no possibility of interest rate cuts before the middle of 2024, and there is a certain chance in the second half of 2024. He believes that inflation will return to the policy target of 2%, but the Fed should be very cautious and patient. He emphasized that the U.S. economy will not enter a recession. (Dovish)
Fed Harker: The U.S. economy is very healthy and the labor market is very strong. He reiterated that he prefers to keep interest rates unchanged while closely monitoring economic data. (Hawk)
Fed Mester: I still support another rate hike. We may already be at or close to the peak of interest rates. It is expected that interest rates will remain at the peak for some time. QT can be completely independent of the rate hike policy. (Hawk)
expert's point
[Morgan Stanley: The surge in yields is equivalent to three rate hikes, and the slowdown in the fourth quarter will prompt the Fed to shift direction]
Rising Treasury yields have led to a marked tightening of financial conditions. Compared to the September meeting, the current environment is equivalent to three additional 25 basis point increases in the policy rate, as measured by the Morgan Stanley Financial Conditions Index (MSFCI).
Whether the tightening is caused by exogenous or endogenous factors. A persistent exogenous rise in interest rates should slow economic growth, requiring the Fed to adjust the path of the policy rate over time to offset the drag from rising interest rates. In contrast, if the rise in interest rates is an endogenous response reflecting continued economic strength driven by more fiscal support, higher productivity, or both, then the Fed may not see the need to adjust the path of policy downward.
“We prefer the former explanation over the latter. We think the third quarter’s growth momentum is unlikely to continue. Ellen Zentner, chief U.S. economist at Morgan Stanley, noted that consumer spending benefited from large one-time events in the third quarter — Barbenheimer, Taylor Swift’s The Eras tour, and Beyoncé’s Renaissance tour… The end of these events, combined with the expiration of student loan moratoriums, will weigh heavily on real personal consumption in the fourth quarter of 23, and therefore on economic growth. Tighter financial conditions due to rising long-term yields will only exacerbate this drag. As a result, we expect fourth-quarter data to show slower growth, which will lead to a reversal of the recent surge in yields due to lower term premiums.”
Fund Flow and Positions
US money market funds saw their largest weekly outflows since Lehman Brothers (Q3 2008), -$99 billion:
All outflows are institutional funds (retail funds flow in):
This could be driven by an extension of the tax payment deadline, but could it be something else?
Both discretionary investor positions (37th percentile) and systematic strategy positions (36th percentile) declined slightly to just below neutral:
Global equity funds (-$5.2 billion) saw outflows for the second week. The U.S. ($0.3 billion) saw slight inflows, while other major regions saw outflows. Bond funds ($2.1 billion) saw inflows at a slower pace than last week.
CTAs continued to cut their overall equity allocations further after shorting the index for the first time since November 2022 last week.
From an industry perspective, except for the energy industry (68th percentile), which is above average, almost all industries have declined and are below the 50th percentile, especially materials (27th percentile), health care (17th percentile) Positions in the 12th percentile) and Financials (12th percentile) are already significantly below average, with positions in Utilities (5th percentile) and Real Estate (2nd percentile) at extreme lows.
CFTC futures data, overall net longs in stocks increased as net longs in the S&P 500 and Nasdaq 100 increased, while net shorts in the Russell 2000 decreased.
In bonds, overall net shorts fell slightly as decreases in 10-year and 30-year net shorts outweighed increases in 2-year and 5-year net shorts.
On the FX front, overall USD net shorts increased slightly as EUR net longs increased:
In terms of commodities, crude oil net longs increased slightly; silver net shorts remained basically unchanged, while gold and silver positions turned from net short to net long; copper net shorts increased further.
Sentiment Indicators
Bank of America's bull-bear indicator has entered the "extremely bearish" zone, which, according to Bank of America's chief investment strategist Hartnett, means that a contrarian buy signal for risky assets has been triggered: historically, the median three-month return after the buy signal implies an upside of 5.4% for U.S. stocks, 7.6% for global stocks, and 9.1% for investment-grade bonds.
The AAII survey showed that the ratio of long and short positions decreased at the same time, while the ratio of neutral views increased, highlighting that the market has entered a tangled stage:
CNN Fear and Greed Index falls close to extreme fear:
This week’s focus
The U.S. GDP Exam
The U.S. government is scheduled to release its first estimate of third-quarter economic growth on Thursday, with markets expecting an annualized quarterly increase of 4.3%, more than double the 2.1% in the second quarter.
US core PCE in September
The market expects that the core PCE excluding food and energy will increase by 3.7% year-on-year in September, a slight slowdown from 3.9% in August, but the month-on-month growth rate will accelerate from 0.1% in August to 0.2%. The market expects the overall PCE price index to increase by 3.4% year-on-year, a slowdown from the previous value of 3.5%, and the month-on-month growth rate will slow down from the previous value of 0.4% to 0.35%.
ECB interest rate decision
The suspension of interest rate hikes this time is a foregone conclusion, but there is still a possibility of an interest rate hike in December. We need to pay attention to what President Lagarde says about the economic situation and interest rate trends at the press conference.
Financial reports of important companies are released intensively
There are 162 companies reporting earnings this week, with the most noteworthy earnings events including Microsoft, Alphabet, Coca-Cola, GE, GM, Meta, IBM, Amazon, Intel, Mastercard, Colgate and ExxonMobil. Although Wall Street currently expects a slight decline in S&P 500 profit growth overall, companies such as Meta and Amazon, which have huge valuations, are expected to make significant contributions to overall earnings growth.
